In the first of many posts, Alex Kazmarck of Currensee Trade Leader SpotEuro presents his analysis of of the EUR/USD. Tune in tomorrow for John Forman's take on some of the same events.
The last two weeks have been a disaster for the euro currency as economic data from Germany and France along with Italy, Spain, and Portugal continued to underperform expectations, culminating with the ECB lowering interest rates by .25%, a move that was not expected by most economists. These developments over the past ten days have led to the euro losing 3.2% of its value against its US counterpart. The 1.3825 high in the pair’s exchange rate may now be in place, unlikely to be revisited anytime soon. Although US economic data has been mixed, the recent surprise in GDP growth and better than expected payrolls data is pointing to a fundamental shift between the ECB and the Fed, with the latter looking to tighten its monetary policy (tapering of QE) sooner rather than later. This shift will most likely lead to a continued correction for the euro in the coming months.
There remain many obstacles for both the euro area and the United States, both suffering from poor employment and deflationary pressures. As mentioned many times by the FOMC members, the Fed is targeting a jobless rate of 6.5% before it begins to increase interest rates. While that figure has been on the decline, the participation rate has fallen to lows not seen since 1978, making it difficult to see the impact QE has had on job creation. This creates a problem in forecasting what actions the FOMC will take in the coming months and is just one example that could easily reverse market direction.
Inflation and employment will most likely be difficult to gauge, so aside from recognizing their importance, we will look at price action for guidance.
The EUR/USD found support just below 1.2800 during the latter part of 2012 and the first half of 2013, bouncing off the figure in late July and rallying 8% to set a new year high. As we can see in the following chart, the pair retraced its first rally by 50% before continuing higher in September through the end of October. With the most recent price action being fundamental in nature, we are using this as a stepping stone to look for further downside. The weekly trend line was broken at 1.3450, which was previous support and will now act as resistance. The next level of support is now just above the 1.3150 level for the pair. While a retracement back above 1.3500 can’t be ruled out, I’m looking to sell on rallies and a break below 1.3100 should confirm the medium-term short bias. Further below is the important 1.2800 level that acted as support for 2012-2013. Should we break that figure, it will act as confirmation of a longer-term short bias and I’ll be looking for lower 1.20s as a target before looking for longer term consolidation.
Near term outlook is for a small correction to 1.3450/1.35 before a continued move lower to 1.3100 near the end of the week/month. There is a lack of economic data from Europe until Thursday at which time we’ll see preliminary GDP readings from France, Italy, and Germany, along with other data. Worse than expected figures will put downward pressure on the euro and support the loose monetary policy guidance shown by the ECB last week.